Job Growth Worries Spur Stimulus Hopes

Monday

Barring a big surprise, the July employment report is likely to push the Federal Reserve one step closer to another round of quantitative easing.

NEW YORK (TheStreet) -- The July jobs report is likely to bring the Federal Reserve closer to another round of quantitative easing, according to central bank watchers.

The consensus estimate is for the creation of 100,000 jobs this month, according to Briefing.com. That would be up from June's total of 80,000 but still nowhere near robust.

"Based on the initial jobless claims data and some of the consumer sentiment data that we've already had for July, it doesn't seem like there was substantial improvement in the labor market in July, so I think this just pushes the Fed one step closer to doing more quantitative easing," said John Canally, an economist for LPL Financial.

"Early estimates suggest that the unemployment rate stays the same or it goes a little bit higher and I think under those circumstances the market would characterize that as not substantial improvement in the labor market and that would lead to the market beginning to price in more QE3 for the Fed," he said.

The Labor Department reported last Thursday that initial jobless claims fell by 35,000 to 353,000 in the week ended July 21. Economists surveyed by Thomson Reuters had forecast that initial jobless claims would fall to 380,000. The four-week moving average declined to 367,250, from 376,000, the lowest level since March.

Economists at Goldman Sachs said the latest improvement should probably be partly discounted given that claims data tends to be volatile around this time of year because of temporary shutdowns in the auto industry. They added that the four-week moving average remained roughly unchanged on a net basis since early April.

On Friday, the final July read on the University of Michigan Consumer Sentiment Index was released and came in at 72.3, slightly better than the consensus of 72, but still a decline from 73.2 in June.

John Burke, president of Burke Financial Strategies, said he does not think that employment growth will be going up any time soon given the large number of companies commenting about longer-term fiscal and budget restraints and European uncertainties. Although the part of Europe that's in recession right now is less than 10% of the world's gross domestic product, "there is somewhat of a domino effect" across the European nations.

"CEOs look at that and it worries them enough that they'll hold off on hiring until things look a little bit more certain; not only with Europe but with the U.S.'s upcoming fiscal cliff," he said.

"We have the Supreme Court's decision to uphold the Affordable Care Act ... also means higher business costs are in the pipeline, so it certainly hasn't been a friendly environment for business and for hiring," said Burke. "CEOs hate uncertainty."

LPL Financial's Canally agreed, saying that a turning point in favor of jobs growth won't occur until companies get more clarity on these issues, adding that a reacceleration in Chinese economic growth would also help companies build up the confidence required to spend and hire more.

It takes jobs growth of at least 150,000 a month just to keep up with the number of people who are coming into the labor force but Burke doubts July's nonfarm payrolls report will hit that level.

It's hard for Burke to imagine that the average per month jobs growth between now and the end of the year, when the fiscal cliff may or may not be resolved by the Congress, will exceed the monthly average of 75,000 jobs added in the April-June quarter. At this rate, according to Andrew Wilkinson, chief economic strategist at Miller Tabak, it would take five years to recover the still-missing five million jobs lost since Dec. 2007.

"I think right now if the jobs data stayed the way it was, it would be a matter of when, not if," the Fed will take action. "They're certainly going to take heat politically if they do it," this year, but then "the Fed has raised or lowered rates in every single election year since at least 1968," said Canally.

If the Federal Reserve feels that it is failing on either one or both of its dual mandate to promote both price stability and maximum employment, there will be a lot of internal debate on whether the central bank should take action in this presidential election year, he said.

"The question is do they want to do it literally right before the election," asked Canally.

"The FOMC meeting right before the elections is in October. They probably don't want to do that. So that would lead you to either Aug. 1 or Sept. 13 ... or wait until December."

The next Fed rate decision is due on Wednesday, but Fed officials won't be briefed on the July employment report until Thursday.

Jim O'Sullivan, chief U.S. economist at High Frequency Economics, believes a new round of asset purchases is much more likely to be announced after the Sept. 12-13 meeting than on Aug. 1 because of the importance of the jobs data.

O'Sullivan said officials could take the lesser step of extending their rates guidance on Aug. 1, while also signaling a growing likelihood that a new round of asset purchases is imminent.

While jobs situation remain tepid, Canally noted that it is nowhere near as bad as it was during the great recession.

At Capital Economics, economists are becoming more optimistic about the July report. The firm is in line with consensus, calling for 100,000 new jobs, and it was encouraged by recent evidence in the Fed's latest Beige Book of temporary employment turning into permanent positions.

"Firms like to test the water before committing to permanent workers," Capital Economics noted.

Last month, the Labor Department reported that U.S. employers added 80,000 new workers to their payrolls in June, below the consensus estimate of 90,000. It was the third straight month of sub-100,000 jobs growth, and the worst quarter for job growth in about two years.

The whisper number among traders was closer to 125,000. The unemployment rate remained unchanged at 8.2%. Nonfarm payroll employment for April was downwardly revised to 68,000 from 77,000 and the figure was upwardly revised in May to 77,000 from 69,000.

Economists caution that July's unemployment report may receive a small bump from auto-plant related seasonal distortions this summer.

-- Written by Andrea Tse in New York.

>To contact the writer of this article, click here: Andrea Tse.

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